Savings and investment depends on your age, your financial condition and your risk appetite. It also depends on your family responsibilities. The freedom to invest in high risk high gain equities or even crypto currencies depends on the funds you can spare to grow really rich. If you do not have that luxury you could find more staid but solid investments to cover your future needs and rainy days.
There is no hard and fast rules for investment. You cannot say that equities are horses and mutual funds are mules. You cannot say property is the best and gold is so yesterday. Nor can you mix all investments and create a perfect solution that will work as the elixir of life. The first thing that you need to identify is the investor, her age, her needs and her mindset. So before we start talking of investing let us make it simple for you to understand your self as an investor. Here are six pointers that you must take care of while doing this analysis.
The 15-30 age group
Let us consider six age groups and understand their needs of investment. The 15-22 age group is usually the dreamers. They have high dreams and minimum responsibilities in most cases, because parents in India provide adequately for their children’s education. Then comes the 22-30 age group . At this time the income starts flowing in and responsibilities are still not over bearing. This is the aspiration group where you want to take risks to grow really fast.
The 30-45 age group
Then comes the transition phase of 30-38 where people usually get into the family mode and the ability to take risks is impaired by the family demands. Next is the 38-45 age group where family, children education and housing, retirement planning becomes the sole priority and risk appetite is severely impaired. This is usually the age group where one earns the most but is burdened with responsibility has little luxury of surplus.
The 45-60 age group
The fifth age group is the 45-52 age where the individual usually has a home and has started to become comfortable with his domestic responsibilities. Usually it is the most stable age group of investors where the individual has a high capacity to invest and also has regained his risk appetite. This risk appetite however starts fading in the age group of 52-60 as retirement clouds hover in the horizon and people become more careful
Why saving pattern is so different in India
In most developed nations a quarter of your income goes towards your housing, a quarter towards your food and a quarter meets your other expenses and a quarter goes into your savings. Not so in India where housing accounts for over 40% of the income and you usually find that you have 10% or lesser left for your savings.
Because of this perennial cash crunch and the need to meet the basic expenses, many Indians lose their risk appetite. They invest in low hanging fruits like Post office Deposits or Bank FD’s or at best mutual funds and cannot think beyond saving for a rainy day.
What is risk appetite
The ability to take risks defines your risk appetite. A person who is ready to bear higher losses in search of higher gains is said to have higher risk appetite. For example if you are investing in Bank fixed deposits, you would lose nothing. But your gain is a small amount from interest payments each year that could be partially eroded by inflation. Mutual funds usually offer better returns, but are subject to market risks. Equities offer even higher returns but the chances of losing money is also high. We will discuss in future how to manage risks and grow your risk appetite.